Purpose The purpose of this study is to examine how depreciation-based non-debt tax shields (NDTS) affect a firm’s ability to cover its interest payments. By focusing on S&P 500 companies, this study aims to investigate whether firms with higher depreciation-related tax shields exhibit stronger interest coverage capacity and whether this relationship is altered when the firm’s leverage level is considered. The study, therefore, contributes to a better understanding of how tax-related advantages from depreciation may support financial stability and reduce interest payment risk. Design/methodology/approach The authors analyze a balanced panel of 255 non-financial S&P 500 firms from 2019 to 2024. The authors estimate a dynamic interest coverage ratio (ICR) model via the two-step system GMM estimator to handle endogeneity, heteroskedasticity, autocorrelation and the persistence of the ICR. The key regressors are the depreciation-related tax shield Δ Depreciation × Effective tax rate), its interaction with leverage, firm size (log of total assets), log revenues and the debt-to-equity ratio. Lagged ICR is included as the dynamic term to capture path dependence in firms’ interest coverage capacity. Findings To motivate the analysis, the authors begin by noting substantial variation among S&P 500 firms in their reliance on depreciation-based NDTS. While some firms benefit heavily from these tax savings, others make limited use of them, underscoring the need to examine whether depreciation-related NDTS meaningfully influence interest coverage capacity. The results show that depreciation-based NDTS have a positive and significant effect on the ICR, indicating that greater depreciation tax benefits strengthen firms’ ability to meet interest payments. However, the interaction between depreciation and leverage is negative and highly significant, demonstrating that this benefit weakens as firms take on more debt. In addition, firm size reduces ICR, revenue growth enhances it and leverage itself exerts a strong negative effect. Overall, the findings suggest that depreciation-related tax shields support interest coverage capacity, but their effectiveness diminishes as financial leverage increases. Research limitations/implications This study has several limitations. First, the analysis focuses only on S&P 500 non-financial firms, which may limit the generalization of the results to smaller or international companies. Second, the study measures NDTS only through depreciation, which may not capture all possible tax-related effects. These limitations should be considered when the findings are interpreted. Future research should test the NDTS–ICR link in emerging markets and small-cap firms and under different tax regimes or policy changes. Practical implications The findings have several practical implications. First, firms can use depreciation-based tax shields as simple and effective tools to improve their interest coverage capacity, especially in periods of financial pressure. Second, managers should be aware that the benefit of these tax shields becomes weaker when leverage is high, suggesting that excessive borrowing may reduce the financial advantage gained from depreciation. Third, lenders and credit analysts can use depreciation-related tax shields as an additional indicator when evaluating a firm’s ability to meet its interest payments. Finally, policymakers may consider how tax rules related to depreciation can support firms in maintaining greater financial stability. Originality/value This study adds value by providing new evidence on how depreciation-based NDTS affect a firm’s ability to cover its interest payments, an area that has received limited attention in prior research. The use of a dynamic system GMM model also brings originality by addressing endogeneity and capturing the persistence of the ICR.
Eldomiaty et al. (Wed,) studied this question.